Expert Advice When You Need It Most

How to Insulate Your Business from Liability

Written by: Chad William Koplien

Reputation Level 12

Business

Posted over 3 years ago. 56 helpful votes, 0 comments

Save

Share with:

Insulate your business through its legal entity formation

Many businesses are organized as sole proprietorships--which means there is no legal distinction between the owner and his or her business. This entity choice can be dangerous, because if the business gets sued, you as the owner are liable for 100% of the damages and defense attorneys' fees. A better choice would be a Limited Liability Company (LLC), which would create a separate legal identity for your business, with some of the tax benefits of a sole proprietorship. If your business is sued, the litigant can collect only from the business, and the corporate identity shields you, the owner, from becoming, in most cases, personally liable. A corporation or LLC can be structured, funded and operated so that the business' assets are not exposed to liability. There are other legal entities to choose from, and you should consult with your attorney to make sure the entity choice is the right fit for you and your business.

Insulate your business through adequate insurance

A business owner must purchase enough insurance to cover company assets and to protect you and your business in the event that you are sued. Even if you form a corporation or an LLC which shields your personal assets from liabilities, you still risk losing your business if disaster strikes. Insurance can reduce this risk. The most common and generally useful types of business insurance policies are property insurance and liability insurance.

Insulate your business with a legal audit

The bane of my profession is the "cost" of attorneys' fees. Many business owners are fiercely independent entrepreneurs who are dyed in the wool "do it yourselfers" who simply do not see the benefit of consulting with an attorney at ever step of the business, from cradle to grave. I am often asked why anyone would need a business lawyer to incorporate, when you can do it yourself over the internet for less than a hundred bucks. A legal audit to determine whether your business is in compliance with the law or is at risk for liability and lawsuits will "fix" unprotected areas and help insulate you and your business from being sued. The cost is nominal, and a stitch in time saves nine!

Additional Resources

When I was young, I just bought a Ford Pinto and the water pump went out. Being a young fellow of limited resources but rich with unlimited optimism, I decided I would replace the water pump on my own. I bought the parts, tools, and a manual. With confidence and a true heart I diligently disassembled critical parts of my engine to reach the water pump, as the parts began to pile up outside the car, the instructions became increasingly confusing. It wasn't too long until I was completely flabbergasted. It would have cost me $60 to have the pump replaced by a mechanic. In the end, I had to total the car.

I learned a valuable life lesson that day, one that can be applied to business owners as well. If you cannot afford to lose your entire venture, then you cannot afford to go without the proper expert advice. To insulate your business from liability, you have to hire a commercial lawyer to protect you. Your lawyer will assemble a battalion of accountants, commercial bankers, and insurance experts to help make sure your business is fully protected.

So in conclusion, get yourself a commercial lawyer to help make sure that: (1) your business entity is appropriate for your needs, (2) you have the proper insurance and you understand the limitations; and (3) that your business is legally audited to include a full check up to discover any potentially devastating hidden legal landmines that could put you out of business!